Conflicting information on CGT between these forums and YIP

[nhan4769]

After reading thoroughly through these forums I have stumbled across some contradictory information on other websites with regards to PPOR becoming an IP and the role that the 6 year Temporary Absence Rule window plays. I would really appreciate some help with explaining these contradictions and how the CGT will actually play out.
To highlight this contradiction I have outlined a simple example below.

Situation:
I purchase a property in 2000 for 300k
I move into it immediately for say 2 years (2002), then move out and rent it out.
At this time I have the property revalued and it is 350k (2002).
I begin leasing from someone else where I live the rest of my days (i.e. I do not buy a second property at any point).
6 years later I again have my property revalued but I do not move back in and continue to lease it. The property is now 650k (2008). Temporary Absence Rule expires.
I continue to rent out the property for 4 more years and sell it in 2012 for 850k.

Understanding after reading these forums:
Based on my understanding from these forums, my 'Cost Base' is (ignoring other costs) the revalued Market Value of the property when I first began renting it (350k in 2002) - as per s118.192 of Income Tax Assessment Act ("You are taken to have acquired the dwelling or your ownership interest at the income time [Income time = the first time it was used for the purpose of producing assessable income] for its market value at that time").
This is despite the property continuing to be my PPOR for the next 6 years.
Therefore my capital gains are = (850k - 350k) * 50% * (10/12) = 208k.
Here I have assumed that if the 6 year window expires, the apportioning method must be used using the time it was rented vs time it was owned.


Understanding after reading YIP:
From this Q&A in YIP:http://www.yourinvestmentpropertymag.com.au/article/qanda-tax-implications-of-moving-into-an-investment-property-117587.aspx
It states:
"If you lived in the property when you first bought it and later rented it out, you can continue to deem the rental property as your home for up to 6 years which means there is no capital gains tax should you sell it within the 6 years even though you have rented the property out. However once the six years is up and the property is still a rental property it will be subject to capital gains tax on a pro rata basis. So, if you owned it for ten years and for the first six years it is deemed your home (no capital gains tax even though it was rented), then the last four years is subject to capital gains tax. Its important that you know what the property is worth on the sixth year to determine the capital gain from the sixth year to the tenth year. If you move back into the property before the sixth year is up than the six year rule starts again."

Here it says that my capital gains is based on the increase in value from the end of the Temporary Absence Rule expiration to the sell date ie:
(850k - 650k) * 50% = 100k

Questions
There are three points I would appreciate clarification on:
- Cost base: Do I use the 2002 Market value from the time of first renting, or the 2008 Market Value (the time the Temporary Absence Rule expired as YIP suggests).

- After I sell it 12 years after first purchase (and 10 years after moving out) do I apportion the capital gains based on "10 years rented/12 years owned = 0.833", or do I use "4 years as an IP (ie past Temporary Absence Rule expiry)/12 years owned = 0.333" OR is it, as YIP implies, apply no apportioning factor simply use the difference between the Sold Price (2012) and the 2008 Market Value (value at time of Temporary Absence Rule expiry) for the capital gains.

- If I move back into the property 2 years after the Temporary Absence Rule expired (2010) for 6 months, then move out and sell it 18 months later (2012) are those last 24 months exempt from capital gains? In fact does this reopen the 6 year window?

 

[Rolf Latham]

cant comment, but Id expect your tax adviser would be the best place so regardless of what feedback you get here, pls seek specific advice

ta
rolf

 

[GaryT]

The market value at the end of the 6 year rental period is irrelevant.

The capital gain in simple terms is the sale price - the market value when first earned income apportioned to exclude the 6 year period. i.e. as per your example if you sell 10 years after moving out then the taxable apportionment is 4/10ths.

If you move back in then the 6 year rule restarts however you don't get 2 bites at the cherry. So using your example if you move back in after 8 years of rental for 2 years, then the taxable apportionment is 2/10ths. However you get to add all maintenance and holding costs while living in the property for that last 2 years to the cost base.

 

[Rob G.]

Your quoted text from the other forum conflicts with Notes 1 & 2 of ATO ID 2003/1113.

 

[nhan4769]

If you move back in then the 6 year rule restarts however you don't get 2 bites at the cherry. So using your example if you move back in after 8 years of rental for 2 years, then the taxable apportionment is 2/10ths. However you get to add all maintenance and holding costs while living in the property for that last 2 years to the cost base.

Gary if I move into the rental in 2010 (2 years after the temporary absence rule expires) for 6 months only, then I move out and rent it again, can I continue to claim it as a PPOR and thus when I do sell at some point in the next 6 years (between 2010 and 2016) I only have to apportion 2 years to it as an IP (2008-2010)?
To lay it out:

Purchase 2000, live in it until 2002, rent until 2010 (2 years after rule expires), move in for 6 months 'resetting the 6 year window', then I move OUT and begin renting it again (lets say for another 6 years, when I sell it in 2016).... Capital gains is apportioned as: 2 years renting / 16 years owned?

Many thanks for all your help

 

[nhan4769]

Your quoted text from the other forum conflicts with Notes 1 & 2 of ATO ID 2003/1113.

Thank you for pointing me to this Rob this was extremely helpful. And Note 1 of that ID (along with Gary's post) answered my second question in my original post.

For those interested:

http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=05%3AATO%20Interpretative%20Decisions%3ABy%20Year%3A2003%3A1100-1199%3A%231113%23ATO%20ID%202003%2F1113%20-%20Capital%20gains%20tax%26c%20main%20residence%20exemption%20-%20interaction%20between%20the%20'absence'%20rule%20and%20the%20'first%20used%20to%20produce%20income'%20rule%3B

 

[GaryT]

Gary if I move into the rental in 2010 (2 years after the temporary absence rule expires) for 6 months only, then I move out and rent it again, can I continue to claim it as a PPOR and thus when I do sell at some point in the next 6 years (between 2010 and 2016) I only have to apportion 2 years to it as an IP (2008-2010)?
To lay it out:

Purchase 2000, live in it until 2002, rent until 2010 (2 years after rule expires), move in for 6 months 'resetting the 6 year window', then I move OUT and begin renting it again (lets say for another 6 years, when I sell it in 2016).... Capital gains is apportioned as: 2 years renting / 16 years owned?

Many thanks for all your help

Yes this is correct. Plus you can add any maintenance and holding costs (interest, light bulbs, etc) during your 6 months residency to the cost base for CGT purposes.

 

[nhan4769]

Yes this is correct. Plus you can add any maintenance and holding costs (interest, light bulbs, etc) during your 6 months residency to the cost base for CGT purposes.

Why can you not claim maintenance and holding costs when you are renting it out? Is it because, when you are renting out a property, you are already claiming those expenses each year to reduce your taxable income, so if you were to add them to the cost base when you sold this would be 'double dipping'?

So any maintenance or holding costs during the time you rent out a property cannot be added to the cost base?

 

[GaryT]

Why can you not claim maintenance and holding costs when you are renting it out? Is it because, when you are renting out a property, you are already claiming those expenses each year to reduce your taxable income, so if you were to add them to the cost base when you sold this would be 'double dipping'?

So any maintenance or holding costs during the time you rent out a property cannot be added to the cost base?

Yes you cannot claim expenses twice. These expenses are generally claimed against your rental income. The CGT calculation is a little more complicated than my simple example so always best to see an accountant.

 

[Ajax]

I have a similar situation....purchased Redfern mid 1993...lived there for 3 years till mid 1996...went overseas and rented elsewhere (no other main residence)...lived again in Redfern house from early 1998-March 1999 then moved out again (and have continued to rent elsewhere).

My understanding is the 6 year PPOR exemption applies again starting from the time when I moved out a second time in Feb 1999 untilFeb 2005.

I always thought if I sold now in 2013 cost base for CGT calculation should be calculated at Feb 2005 (the time at which I lost the main residence exemption). 2005 was close to the peak of property prices for next few years so I could possibly have a fairly high valuation then (although there would be substantial capital gain since that time).

 

[Ajax]

Just read note 1 and 2 to ATO Interpretative Decision
ATO ID 2003/1113.

"Not happy Jan".

I've now also had a look at related interpretative decision ATO ID 2003/1112
http://law.ato.gov.au/atolaw/view.htm?locid='AID/AID20031112'&PiT=99991231235958

which suggests (at least in my case) that as the property first became income producing before 20 August 1996 then the cost base would possibly be the date I moved out for a second time (i.e. March 1999) and if I have made an election for my property to be my main residence then the capital gain is roughly the gain from 1999 to date of sale apportioned between the time the property was my main residence + the following 6 years that I rented it out and the following period up till date of sale.

If the property was worth 400K in 1999 and I sold in 2015 for $1.2m the capital gain is $800k. This is apportioned 6/10 so I have a partial capital gain of 62.5% x $800k= $ 500k reduced by 50%= $250k which is added to my taxable income that year (sheesh!) That's going to be about $81k additional tax in the year I sell.

I hope my local accountant and ED Chan Chan Naylor who wrote the answer in YIP are correct and not the ATO interpretative team. I cane see appeals to the Adminstrative Appeals Tribunal and Federal Court on this.

Query: When can that election for property to be considered your main residence under the 6 year rule be made? In the year the property is sold?

A 1999 cost base for Redfern is still going to result in a large taxable capital gain. At least there appears to be a partial main residence exemption from capital gains tax (as a result of the apportionment referred to above). In my case I will get 6 years partial main residence exemption.

One solution is don't ever sell (and don't create a capital gains tax event in the first place (until you die).

 

[Rob G.]

As the property was first used to produce income before 20 August 1996 then s.118-192 has no application.

It can never apply according to s.118-192(1)(aa).

Market value is irrelevant.

 

[Ajax]

Rob G (I just got into austlii).


OK...I see that is fine in relation to the May 1996 income producing....but is it fine in relation to the March 1999 income producing or am I taken to have acquired the property at its market value (for the purposes of CGT calculation) in March 1999?

What do the words "that use occurred for the first time after 7.30 pm on 26 August 1996" mean in this context?

Can I contend the March 1999 income producing was the second time? Not sure this is what the legislators intended when drafting this.

"INCOME TAX ASSESSMENT ACT 1997 - SECT 118.192
Special rule for first use to produce income
(1) There is a special rule if:

(a) you would get only a partial exemption under this Subdivision for a * CGT event happening in relation to a * dwelling or your * ownership interest in it because the dwelling was used for the * purpose of producing assessable income during your * ownership period; and

(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and

(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time ) it was used for that purpose during your ownership period.

(2) You are taken to have * acquired the * dwelling or your * ownership interest at the income time for its * market value at that time.

 

[Rob G.]

You are interpreting the s.118-192(1)(aa) phrase "that use occurred for the first time after ... " as meaning "the first occurrence of that use after ... ".

This is not a reasonable construction given it has been specifically inserted to emphasis the "first use" phrase in the title.

This is to reflect the fact that it is rewritten from s.160ZZQ(20D) using different words but intended to mean the same. The original wording was more specific.

Referring to s.160ZZQ(20D)(b):

"b) for the first time (the first income time ) since the acquisition, the dwelling begins to be used for the purpose of gaining or producing assessable income; and "

If that is not enough, then the insertion schedule for that Division states in TAXATION LAWS AMENDMENT ACT (NO. 3) 1997 - SCHEDULE 5:

"(3) The amendments made by Division 4 of Part 1 apply to a dwelling owned by a taxpayer if:
(a) for the first time since the taxpayer acquired the dwelling, it is used for the purpose of gaining or producing assessable income; and
(b) that time is after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996. "



So "first income time" means exactly that ... the first time used to produce income since acquisition.


Cheers,

Rob

 

[Ajax]

Rob G.

Thanks for that. You sound liyou're a very competent tax lawyer .

Once upon a time I was familiar with the old s.160ZZQ provisions (around the time the CGT legislation came out) but I have little idea about 1997 legislation.

There must be a lot of work around for tax lawyers in the AAT and Federal Courts atm.

Who says that rising property prices don't benefit other sectors of the economy?

Ajax